On November 8th, 2016 will be etched in Indian history as a landmark date. This was the day when Prime Minister Narendra Modi announced his demonetization move- scrapping of existing Rs 500 and Rs 1000 notes in a bid to end the vicious cycle of black money, curtail counterfeit currency, countering terrorism financing and mainly promote cashless economy. The announcement was like a bolt from the blue and it caught the entire country unaware. New notes of Rs 500 and a newer denomination of Rs 2000 were introduced. A very tight timeline was provided to the people for exchange of their old notes from the banks. Long queues outside ATMs and banks became the order of the day as cash shortage affected daily livelihood and drove down consumer spending. The government assured that the ordeal is only temporary and demonetization has its long term benefits. A thorough analysis of the events will help us to understand the rationale behind this sudden move.
Demonetization is not an entirely new concept in India. Already such moves had occurred in 1946 and 1978. The aim was always to demonetize high value currency in favour of new ones to curb black money. But the November 8th announcement was high on shock value-nobody had seen it coming. The entire country was sent into frenzy when Modi announced that Rs 500 notes and Rs 1000 notes will cease to be a legal tender. This was a very bold decision. Both the denominations formed 86% of the currency in circulation, by value. Scrapping them and replacing them would be a huge and challenging task. The logistical challenges in a vast country like India and the infrastructure required to carry out the entire process would be a real headache for the government.
Black money is definitely one of the reasons. It is a problem that has given sleepless nights to many in the Indian tax and legal administration. Illegal money, money on which no tax has been paid, undeclared money and disproportionate assets are some of the components of black money. With one stroke of bold decision making, the government rendered all black money, hidden as unaccounted cash in households, as mere pieces of paper. The demonetization move would ensure that a large part of the black money comes back to the banks and this would help the bank to lend more money and boost growth and employment. The prevalence of counterfeit money is another reason for scrapping the high value currencies. Fake money circulation is a huge problem and is detrimental to growth and prosperity. Not only this, the counterfeit currency was also used to fiancé terrorism and drug usage. The demonetization move would be a big blow to the counterfeit currency racket as their business would be badly hit with the government introducing new notes that their machines cannot produce a fake copy of. And one of the most progressive reasons that Modi had provided for demonetization is the aim to make the economy cashless. Digital economy would ensure that transactions become easier and there is more tax compliance. The cost of printing currency would substantially come down for RBI. This money saved can be used by the central bank to lend to other banks. Higher lending ability is always a strong indicator for growth in the country. All these reasons prompted the Modi government to take the demonetization step and that was done in ultimate secrecy to prevent knowledge of it being leaked to public.
However, due to demonetization the common public had to face a lot of ordeals. Daily wage labourers suffered the most as they were without both cash and jobs. Informal sectors that depend on cash transactions took a hit. Consumer spending spiraled down and growth was hit. People spent hours outside banks and ATMs. Reports of people dying while waiting in queues also surfaced. Productivity took a hit and day to day livelihood was hampered. Bank employees had to work overtime and their efforts must be lauded. So this gives rise to questions if the move could have been better planned out and implemented in a better way. Since India is a vast country the logistics behind delivering cash to all parts of the country could have been better handled with micro ATMs and ATM vans deployed to all nooks and corners. The common man suffered once again which in all probability could have been prevented.
Three months later it is still for debate if the government was right to scrap high value currency or it was a poorly implemented plan. Crores of rupees have been deposited and this is a plus point. Also, black money hoarders are in constant fear.
However, the problem faced by the common people cannot be forgotten. In conclusion, being a well- intentioned move, demonetisation in India could have been a well-implemented move. It would have been a well-implemented move. It would have been a masterstroke. It still can be.